Russian IT Industry bounces back, rides high on cloud

Hardware continues to dominate the Russian IT market, making up more than 50 percent of the sector. Source: ITAR-TASS

The Russian IT market is growing fast, but the number of problems that have come to the forefront are proving to be a serious threat.

It seems clear to both financial
institutions and independent analysts that the Russian information technologies
market has recovered completely from the 2008 financial crisis. Russian
Minister of Communications Igor Shchegolev has reported that the country’s
information technologies market saw a growth spurt of 14.6% in 2011, and the
Ministry of Economic Development predicts that the market will grow by 15.8% in
2012, and by 18.1% in 2013.

The stock analysis center Infin wrote
in a recent analytical report entitled “Targeting the IT Market” that the
market could very soon return to the volumes and growth rates witnessed before
the crisis hit, as long as nominal GDP grows by 18.5% annually and the ruble
continues to strengthen.

Currently Russian IT companies control
1% of the global market for information technology product and services, worth
roughly $16 to 20 billion. The Ministry of Economic Development forecasts that
the volume of the Russian IT market will hit $32 million by 2013. But behind
these positive numbers are questions about the sector’s overall potential. The World
Economic Forum rates Russia 77th in the world for growth in
the information and communications technologies sector and 3rd among
resource-oriented countries. Today Russia exports at most $1.5 billion of IT
services, and no more than 300,000 people work in the country’s IT industry.

Hardware continues to dominate the
Russian IT market, making up more than 50% of the sector. The rest of the
segment there belongs to IT services (50%) and software (20%).

“This is the heritage of the past,”
said Konstantin Chernyshov, a chief analyst at Uralsib financial corporation,
discussing the situation in Russia. “Many Russian companies started making or
assembling hardware, but this share is shrinking gradually as more and more
companies are switching to making software and other high marginal segments.”

One place Russian companies hope to
compete with international players is in cloud technology.

Although this sector is fairly small
at the moment, Chernyshov believes its growth rates will blow away similar
figures across the entire IT services market in the period up to 2015. The
Russian government is a major promoter of cloud technology. One project in the
works is a national cloud service for organizing inter-departmental
computerized interaction. It will also provide state and municipal services to
the public. Market intelligence firm IDC predicts that the value of the cloud
services market in Russia in 2015 will reach $1.2 billion. In 2010, the market
was valued at just $35 million.

But because the Russian government has
suddenly become the biggest customer on the IT market, many companies are being
created to serve governmental purposes, which has both positive and negative
consequences: it makes the sector much more sensitive to changes in the state
budget. Many governmental programs have given disappointing results.

“Officials just need a tick in the documents
while business is focused on the profit,” said Ilya Rachenkov, an analyst with
InvestCafe. But government support is needed to make any positive developments
in the system and even skeptics admit that its influence is not all bad.

Rachenkov confirms that he has
heard good opinions on Skolkovo from businesses of all sizes. “For them it’s a
place where they can come and get real investment without long bureaucratic
procedures. Everybody is surprised because start-ups are traditionally
supported by investment angels, not government.”

Nevertheless, both Rachenkov and
Chernyshov believe the private sector would do a better job in developing the
IT industry than the government. Even here, however, there are barriers to
entry.

Russia’s IT market is dominated by
several big companies. The top 10 Russian IT firms accounted for 70% of all
revenue earned by Russia’s top 30 IT companies. These top 10 control 54% of the
Russian IT market – 5% more than in 2009.

For companies willing to pay the labor
costs, there are other problems. Foreign competitors such as Apple, HP, Foxconn
and TrendMicro are entering the Russian IT market in droves, and this expansion
will only increase after Russia joins the World Trade Organization. These
companies have notable financial resources and leading technologies to attract
Russia’s top IT specialists.

“Many foreign software companies
already have Russian specialists on staff,” said Rachenkov, and this is likely
to increase as these companies establish themselves on Russian territory. But despite the country’s reputation as a source
of top software designers and engineers, the reality is that the pool of
actually qualified specialists is limited. Experts believe that the future of
the IT market is in the Russian regions, whereas at the moment it is
concentrated in Moscow and St. Petersburg.

But overall growth in the IT sector,
like in the rest of Russia’s economy, will depend on real economic growth, an
increase in investment activity, stabilization of the country’s financial and
political situation, an increase in personal incomes, a stable exchange
rate, moderate inflation and benefits that can encourage new enterprises to
form.